Green Apples Inc. is considering acquiring a Chinese cell phone factory. The factory will cost 500 million yuan (CNY) in year 0 (all cash flows are in millions of Chinese Yuan (CNY)). The incremental cash flows from the plant are expected to be: 200, 300, 100 in years 1, 2 and 3 respectively. In addition, at the end of year 3 the factory is expected to be sold. The sale is expected to generate an incremental cash flow of 100. The spot rate (i.e., exchange rate) is currently 0.14 USD/CNY.

Green Apples pre-tax cost of debt is 8%. Its cost of equity is 14%. Its corporate tax is 50%. The firm is 75% debt financed. The Chinese Yuan is expected to (i) remain unchanged against the dollar in year 1, (ii) appreciate 5% against the dollar in year 2 and (iii) depreciate 12% against the dollar in year 3 1.(6 points) Should Green Apples Inc. accept the project? Why or why not?

2. (3 points) If Green Apples capital structure was instead 50% debt and 50% equity, would Green Apple be more likely to accept the project? Explain why your answer makes sense.